Investing In Cds, How Does It Work?

How does investing in cd's (certificates of deposit) work? A cd is a means of saving, much like a savings account or a money market account, the difference is that it can bear a much higher rate of interest. The draw back to this type of account is reduced flexibility when it come to gaining access to your money. Money placed into a cd is required to remain there until a specified maturity date at some point in the future. Various lengths of investment are available, typical periods range from three months to five years, although ten and twenty year cd's are available. If money is withdrawn prior to the maturity date an early withdrawal fee or penalty is payable, usually equivalent to three to six months interest on the deposit.

An advantage to cd's is that in the U.S. your money is FDIC insured (Federal Deposit Insurance Corporation). This means that even if the bank was to go bankrupt (unlikely) your money is still safe.

Like many savings accounts cd's compound interest, basically meaning that interest earned is applied to the principal investment then the interest also begins to earn interest. Compound interest if left alone can make you very wealthy indeed!

So when is an investment in cd's a good idea?

-When you have a sum of money that you will not need for a while and you are not tempted to touch it.

-When you are not comfortable with higher risk investments.

-When better interest rate are being offered than money market accounts or standard savings accounts.

As with any investment this is only a guide and professional advice should be sought before making any decisions.

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